Leave entitlements are a real liability, not a budgeting footnote. The business owes those hours to employees regardless of when they're taken, and Australian accounting standards require that liability to appear on the balance sheet at the correct carrying amount. Getting the provisioning wrong distorts profit margins, understates liabilities, and can cause unpleasant surprises when key employees leave or take extended leave.
The Accounting Standard Framework
For businesses applying the full AASB suite, AASB 119 Employee Benefits governs leave provisioning. For smaller entities applying the simplified Tier 2 framework (AASB 1060), the measurement approach is streamlined but the recognition requirements are the same: short-term obligations must be recognised when employees render service.
The key classification split:
- Short-term employee benefits: Expected to be settled within 12 months of the reporting date — measured at undiscounted amounts
- Other long-term benefits: Annual leave not expected to be settled within 12 months, and long service leave — measured at present value (discounted)
In practice, most small-to-medium businesses classify all annual leave as short-term (undiscounted) if employees typically take their leave within 12 months. If annual leave balances routinely accumulate over multiple years, the long-term classification and discounting obligation kicks in.
Annual Leave Provisioning
What Goes Into the Provision
The annual leave provision must reflect:
- Accrued entitlement: Hours accrued but not yet taken, valued at the current pay rate (not the rate when accrued)
- Leave loading: If the enterprise agreement or award includes 17.5% annual leave loading, this must be included
- On-costs: Payroll tax and superannuation on the leave when it's expected to be taken (noting that SG applies to leave payments)
The provision is measured at the amount the employer expects to pay to settle the obligation. If wages are likely to be higher when the leave is taken (due to pay rises), the provision should reflect the expected settlement amount.
Monthly Accrual Journal
Most practices accrue leave monthly. For an employee entitled to 4 weeks annual leave per year, the monthly accrual is:
DR Annual Leave Expense $XXX
CR Annual Leave Provision (liability) $XXX
When leave is taken:
DR Annual Leave Provision $XXX
CR Wages Payable / Cash $XXX
The provision account should never go negative. If an employee takes leave in advance of accruing it, the excess should sit in wages expense, not as a negative provision.
Leave Loading
Leave loading of 17.5% applies to the leave payment itself (not to loading on base wages). If an employee is paid $2,000 for a week of annual leave, the leave loading adds $350, making the total $2,350. GST does not apply to wages, including leave loading. Payroll tax and super apply in the same manner as ordinary wages.
Some modern awards have absorbed leave loading into a higher base rate — check the applicable award or agreement before accruing loading separately.
Long Service Leave
Long service leave is more complex because the entitlement vests over many years, and the probability of the employee remaining to receive it matters.
Entitlement Thresholds
LSL entitlements vary by state:
- NSW: 2 months after 10 years; prorated after 5 years on termination
- Victoria: 6 weeks after 7 years (and prorated after 7 years on resignation)
- Queensland: 8.6667 weeks after 10 years; prorated after 7 years
- WA: 8.6667 weeks after 10 years
Check the applicable state legislation — the entitlement has real financial consequences for provisioning.
Probability of Vesting
The AASB 119 requirement for long-term benefits is to estimate the probability that the employee will actually reach the vesting threshold. Booking 100% of the theoretical entitlement overstates the provision for employees with, say, 2 years of service. A common approach:
- Under 5 years: 20–30% probability factor
- 5–7 years: 50–70%
- 7+ years: 80–100%
These are indicative — use historical staff turnover data where available.
Discounting
Unlike annual leave, LSL is discounted to present value using the yield on high-quality corporate bonds (or government bonds in markets where no deep corporate bond market exists — which is the prescribed approach for Australia under AASB 119). Use the 10-year Commonwealth Government Bond yield as the discount rate. At current yields (approximately 4.5–5% in late 2026), a liability payable in 8 years is discounted meaningfully.
LSL Journal
Annual accrual:
DR Long Service Leave Expense $XXX
CR Long Service Leave Provision $XXX
The unwinding of the discount is recognised as interest expense in subsequent periods under AASB 119 — though many smaller entities take the pragmatic approach of re-measuring the provision annually rather than booking monthly discount unwinds.
Balance Sheet Impact
Leave provisions appear as current liabilities (expected to be settled within 12 months) and non-current liabilities (the remainder). The split matters for working capital ratios and loan covenant compliance. A business with $800,000 in accumulated LSL across long-serving employees has a real balance sheet obligation that affects net asset calculations.
Reconciling Leave Provisions
Leave provision reconciliations should be performed monthly:
- Opening balance
- Plus: accruals for the period
- Less: leave taken (settled from provision)
- Less/Plus: rate adjustments (when pay rates change)
- Closing balance
This closing balance should agree with the payroll system's leave liability report. Discrepancies most commonly arise from:
- Leave taken that wasn't cleared from the provision
- Pay rate changes not applied retrospectively to existing balances
- New starters or terminations that weren't processed through both payroll and the general ledger
ReconLink's transaction coding features can help identify leave payments from bank transactions and match them against provision movements — useful when the payroll system and accounting system are maintained separately and reconciled only periodically.
At Termination
When an employee leaves, any unpaid leave entitlement (annual leave, LSL if vested) is paid out as a termination payment. The journal:
DR Annual Leave Provision $XXX
DR Long Service Leave Provision $XXX
CR Wages Payable / Cash $XXX
Any difference between the provision and the actual payout (due to estimation differences) goes to wages expense. Redundancy payments above the tax-free threshold are subject to different withholding rules under PAYG.
Practical Controls
- Run payroll leave reports monthly and reconcile to the GL provision before period close
- Apply award rate changes retrospectively to existing leave balances immediately — not at year-end
- Flag employees approaching LSL vesting thresholds so cash flow planning can account for likely leave take-up
- Keep documented assumptions for LSL probability factors and discount rates — auditors and the ATO can query these